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1. General Situation: Still Dynamic

China's economy has been growing rapidly and steadily after a soft landing in 2002. This pattern was also kept in the year 2005. The Yangtse delta region - including in this term the city of Shanghai and the two provinces of Jiangsu and Zhejiang - continues to play a locomotive role in the country's economy, in particular in the field of investment and foreign trade.

China's economy increased by 9.9% in 2005, compared to 2004. The gross domestic product (GDP) rose to 18' 232.1 billion RMB in 2005, an equivalent of 2259.2 billion USD (according to the official Chinese exchange rate: 100 USD = 807.02 RMB at the year's end).

During the same period of time, the aggregate GDP of the delta region climbed to 4' 078.1 billion RMB (505.3 billion USD), accounting for 22.4% of China' s total GDP, a remarkable result compared to its rather low percentages of population (10.9%) and area (2.2%).

Shanghai reported a GDP of 914.40 billion RMB (113.3 billion USD) in 2005, an increase of 11.1% (13.6% for the year of 2004) over the previous year. This was Shanghai's fourteenth year with double-digit growth rate. Jiangsu Province, the second largest provincial economy in China after Guangdong province, recorded a GDP of 1'827.21 billion RMB (226.4 billion USD), up 14.5% (14.9% for the year of 2004) and 4.6 percentage points higher than the national average. The GDP of Zhejiang province reached 1'336.50 billion RMB (165.6 billion USD), up 12.4% (14.3% for the year of 2004). Measured by per capita GDP (27,552 RMB or 3,414 US$ in 2005), Zhejiang has the highest provincial income in China.

2. Private Consumption: Increased Steadily

The country's private consumption increased considerably during 2005, reflecting an increase of the personal income of Chinese consumers. Per capita disposable income of Chinese residents in cities and towns in 2005 was RMB 10,493, up 9.6% from 2004, while per capita income of farmers at the same time was RMB 3,255, up 6.2%.

China's total retail sales climbed to 6717.70 billion RMB, up 12% in 2005 (13.3% in 2004). In the same period, retail sales in Shanghai totaled 297.30 billion RMB (36.84 billion USD), up 11.9% (compared with 10.9% for the year of 2004) from the previous year; in Jiangsu it was 569.99 billion RMB (70.63 billion USD), up 16.0% (compared with 16.6% for the year of 2004) and in Zhejiang it totalled 463.20 billion RMB (57.40 billion USD), up 13.2% (compared with 15.5% for the year of 2004).

During the same period, in spite of the pressure of soaring oil price, price increases were kept at low levels in China. The consumer price index has moved up only 1.8 percent in 2005.

3. Investment in Fixed Assets: One of the Main Engines of Growth

Domestic investment in fixed assets has been one of the main engines of China's growth since 1998 (after the Asian financial crisis). Chinese economic growth has been strongly driven by a pro-active fiscal policy, leading to heavily increased investments in fixed assets, especially in the field of infrastructure such as construction of highways, railways, new factories and houses.

Reaching 8'860.40 billion RMB (about 1,098 billion USD), enacted investments in fixed assets for the whole of China grew at a quite high rate of 25.7% in 2005 (25.8% in 2004) over the previous year. In the delta region, investment in fixed assets kept high in 2005 as well: in Shanghai, they reached 354.26 billion RMB (corresponding to 43.9 billion USD), a rise of 14.8%; in Jiangsu they totalled 873.97billion RMB (34.14 billion USD), a rise of 28% and they recorded 873.97 billion RMB (108.3 billion USD) in Zhejiang, an increase of 15.1% over the previous year.

4. Foreign Investment: Remained on High Level

China has become one of the most preferred destinations for foreign direct investments in recent years. Foreign direct investment (FDI) in China in actually utilized terms totalled 60.30 billion USD in 2005, a slight decrease of an half percentage, but still on an high level.

Multinationals are moving more and more of their manufacturing bases from world-wide production sites to China. By the end of 2005, there were about 534'000 foreign invested enterprises in China, with a total contracted amount of 1.2 trillion USD and actual foreign investment of 600 billion USD. It is important to realize, however, that about two thirds of the capital under the heading of FDI is still coming from different ethnic Chinese sources.

The Yangste delta region still saw a massive influx of foreign investment in 2005, but the momentum is obviously weakening. The total FDI of the region was about 27.75 billion USD in 2005 (25.36 billion USD in 2004) in terms of actually utilised value, accounting for 46% of China's total. Actually utilised FDI in Shanghai was 6.85 billion USD (6.54 billion USD for 2004), an increase of 4.7 % over the year 2004, which shows a downward growth rates: up 11.8% in 2004 and up 30.1% in 2003. In Zhejiang it amounted to 7.72 billion USD (6.68 billion USD for 2004), an increase of 15.6%, which also shows a downward growth rates: up 22.6% in 2004 and up 72.4% in 2003, and in Jiangsu it reached 13.18 billion USD (12.14 billion USD for 2004), an increase of 8.6% (up 14.5% in 2004 and up 52.4% in 2003). Jiangsu became the most preferred province for FDI, surpassing Guangdong province (12.68 billion USD in 2005) since 2003 in terms of both contracted and actually utilized FDI.

As China is realizing many promises in line with its WTO agreements, more capital is flowing into fields such as banking, tourism, commerce, hospitals, education and etc. The government's decision to encourage foreign investment in restructuring state-owned enterprises will also provide more opportunities for FDI. According to statistics of MOFCOM, 18 joint venture banks, securities and insurance firms and fund management companies were approved and set up in 2005, with an actualized FDI of 12.081 billion USD.

5. Foreign Trade: Another Motor of Growth

China's total foreign trade volume increased by 23.2% to 1,422.1 billion USD in 2005. Exports rose 28.4% (up 35.4% in 2004) to 762.0 billion USD (593.4 billion USD in 2004); imports grew by 17.6% (36% in 2004) to 660.10 billion USD (561.4 billion USD in 2004); China's foreign trade in

2005 showed therefore a surplus of 101.9 billion USD (surplus in 2004: 32 billion USD). China's economic boom, the stronger domestic competition and the rising export capacity of foreign-funded enterprises have spurred exports.

FDI enterprises in China are playing a more and more important role in China's foreign trade. According to the official statistics, FDI enterprises contributed 58.5% to China's foreign trade in 2005, compared to 53.9 % in 2003. Total imports and exports by FDI enterprises recorded 831.73 billion USD, an increase of 25.4% in 2005. Exports by FDI enterprises increased by 31.2% to 444.21 billion USD, accounting for 58.3% of the total exports of China. Imports increased by 19.4% to reach 387.52 billion USD, accounting for 58.7% of China's total imports.

The delta region held a leading position in China' s foreign trade. The export value of Shanghai was 90.74 billion USD in 2005 (73.52 billion USD in 2004), an increase of 23.4% (up 51.6% in 2004) compared to the same period of the previous year. Jiangsu exported goods in the value of 122.98 billion USD (87.56 billion USD in 2004), an increase of 40.5% (up 48.1% in 2004) and Zhejiang' s exports grew 32.1% (39.8% in 2004) to reach an amount of 76.80 billion USD (58.16 billion USD in 2004). The region's total export value reached 290.52 billion USD (219.24 billion USD in 2004), accounting for about 38.1% (37% in 2004) of China' s total export value.

Imports in the Yangtse delta region increased slower than exports in 2005. Shanghai imported goods with a value of 95.62 billion USD (86.51billion USD in 2004) in 2005, an increase of 10.5% (57.4% in 2004) over the previous year. Jiangsu imported 104.96 billion USD (83.25 billion USD in 2004), an increase of 26.1% (up 52.7% in 2004) and Zhejiang' s imports grew 13.0% (up 36.6% in 2004) to reach an amount of 30.59 billion USD (27.07billion USD in 2004). The region's total import value reached 231.17 billion USD (196.83 billion USD in 2004), accounting for 35% (also 35% in 2004) of China' s total imports.

The trade balance of Shanghai therefore showed a deficit of 4.88 billion USD in 2005 (a deficit of 12.99 billion USD in 2004), reflecting the city' s increasing demand for foreign goods in the high-tech and higher quality brackets due to internationalisation in the field of consumer goods, due to a fast and steady increase in personal income and due to the growing import demand of foreign-funded enterprises as well. Jiangsu showed a trade surplus of 18.02 billion USD, compared to a surplus of 4.31 billion USD in 2004 and Zhejiang remained the most aggressive trading province in China with a trade surplus of 46.21 billion USD (a surplus of 31.09 billion USD in 2004), which ultimately contributed positively to China's trade balance. As a result, China's foreign exchange reserve reached 853.7 billion USD by the end of February 2006, surpassing Japan to become the world's largest FOREX holder.

6. The Important Role of Yangtze Delta Region in the Sino-Swiss Bilateral Economic Relation

The Yangtze Delta region plays a very important role in the Sino-Swiss bilateral economic relation: about one third of the Sino-Swiss bilateral trade, in terms of both import and export, is conducted through the Yangtze Delta region and four fifths of the total contracted Swiss investment in China goes to the region. In terms of accumulated capital two thirds of the Swiss investment at the end of 2005 was in the Yangtse Delta region.

Swiss trade relation with the Yangtze Delta region continued to develop smoothly, although the tempo was slow down. As Table 2 shows the region imported goods with a total value of US$ 1,486.95 million from Switzerland in 2005, a slight decrease of 0.15% over the previous year, and exported a total value of US$ 648.28 million to Switzerland with an increase of 18.56%. With the expansion of the Swiss presence in the region, Swiss-invested companies also contributed a considerable part to the total export volume. It is also noteworthy that all the figures do not include
the indirect trade via Hong Kong, therefore the numbers do not show the increasing demands of high quality Swiss made consumers goods, which are mainly distributed by Hong Kong agencies.

Swiss direct investment is increasing steadily in China and the Yangtze Delta Region. Last year, there was a total of 125 Swiss-invested projects in China, with a great part (71 projects) concentrated in the Yangtze Delta Region, and a third of them (39 projects) in Shanghai. By the end of year 2005, Swiss direct investment totalled UD$ 3,382 million in terms of accumulated contractual value for 826 projects in China. Among them, UD$ 1,451 million is located in Shanghai, while the numbers for Jiangsu and Zhejiang were UD$ 546 million and UD$ 81 million respectively (See Table 3). The large number of Swiss companies in the Delta Region is mainly due to considerable investments of Swiss SMEs around Shanghai.

7. The Challenges: Old and New

Many signs show that the development of the Chinese national economy remains dynamic. Chinese government aims still high. According to the report on the work of the government delivered by Premier Wen Jiabao at the annual session of China's national legislature, GDP should grow about 8% in 2006, which is regarded reasonable by the main economists. An annual growth rate of 7.5% for the national economy during the 11th Five-Year Plan period (2006-2010) has also been worked out recently. Economy of the Yangtze Delta region will grow "as a rule" faster and another double-digit growth rate for the coming year is likely.

However, the economy is facing many challenges, old and new. The old structural problems are not really resolved. The high growth rate of the economy was accompanied by excessive investments in fixed assets, which took up 40% to 50% of GDP, by high energy consumption, environmental pollution and many working accidents. Unemployment rates are still high (at about 4.5% officially), and the hidden unemployment in the countryside in particular will not be corrected soon. The wealth gap, not only between urban and rural residents, but among urban households as well, is still widening. The reform of the SOEs met obviously with some difficulty in 2005. The losses of the SOEs during the year was announced as reaching 102.6 billion RMB (up 57%), close to the record high in the year 1998, but was corrected later on.

On the other hand, being integrated into the global economy as the world's 3rd largest trading nation and one of the largest destinations of foreign direct investment, China is also facing challenges from outside: crude oil price increases, growing trade frictions, and mounting pressures of revaluation of its currency.

Another important but very sensitive problem is the political reform, which was more and more discussed in China as corruption is becoming more and more rampant in all activities.

Li Rongzhang

General remarks:
1. GDP volumes are at prices of the reported years (not adjusted).
2. GDP growth rates are price-adjusted.
3. All figures are based on the unrevised data of China's statistical authorities.

Table 1.
Current Economic Indicators* of the Swiss Consular Area

Source: Chinese Authorities
* All statistics not including Taiwan, Hong Kong and Macao; Figures of the year 2004 refer to the unrevised ones; Growth rates are price-adjusted.

Table. 2
Swiss - Yangtze-Delta Region Trade Relations

Source: Chinese authorities

Table. 3
Swiss Investment in Delta Region

* One withdrawal of investment of UD$ 220 million deducted already, which explains the unusual difference between contracted and actually used amounts.
Source: Chinese authorities

5.4.2006

Consulate General of Switzerland
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